Zimbabwe's economic crisis worsens - again

ZIMBABWE’S fragile economy, which is in debt distress, is headed for a contraction that could trigger an unprecedented humanitarian, economic and social crisis following a slowdown in recovery witnessed after dollarisation in 2009, the Financial Gazette can report. An economic contraction could result in increased job losses, which would affect the vulnerable groups most. It would also further erode disposable incomes, which have been under attack for the past few years due to a deteriorating liquidity situation in the country. This would certainly be a worrying development considering that the country went through its worst economic crisis in history between 2000 and 2008, during which period sustained and broad-based decline led to a cumulative decline of nearly 50,3 percent in real gross domestic product (GDP). Analysts contend that the economic contraction resulted in a rapid increase in poverty, with real per capita income falling sharply from about US$644 in 1990 to US$433 in 2006 and then to an estimated US$338 in 2008. The country is already grappling with high unemployment, estimated unofficially to be at over 80 percent. The situation has forced many to resort to vending to eke out an honest living, but government last month drove out from the streets of central business districts across the country hundreds of unemployed street vendors selling different wares, from tomatoes to second hand clothes. Official figures released by Finance Minister Patrick Chinamasa last week pointed to a worsening economic situation that is clearly making policy implementation difficult, with recovery, which slowed down in the last three years, projected to further weaken to near-zero levels this year. There was a strong possibility the country would register negative growth next year, said economists, warning of increased company closures and job losses that would present insurmountable fiscal challenges for government. “Things are worsening; there are no two ways about it,” said economist, Witness Chinyama. “The measures put in place by Chinamasa last week will not stem the decline.” Invictus Capital, a securities advisory firm, said Chinamasa’s mid-term fiscal policy review has “confirmed our fears that the economy has stalled”. “We do not expect the economy to recover in the near term,” the company said, projecting GDP narrowing this year by about one percent. Former finance minister Tendai Biti said the economy would this year shrink, rather than grow, by between 0,8 and two percent. He said the economy would further contract by five percent in 2016. Chinamasa said a fiscal policy review statement he presented last week was meant to give a cue on “where we want to go and what requires to be done during the last half of 2015 to reinforce our recovery and development course”. But he revised downwards growth projection figures for 2015 from a moderate 3,2 percent to 1,5 percent. When the country adopted a hard currency regime in 2009 after ditching its own currency due to hyperinflationary pressures, the economy burst into a post-hyperinflation rebound, registering GDP growth – however described by many economists as recovery — averaging seven percent, while inflation remained in the low single digit levels largely due to the hard currency economy. Government revenues more than doubled from 16 percent of GDP in 2009 to an estimated 36 percent of GDP in 2012, allowing the restoration of basic public services. But that suddenly ended in 2013 with GDP growth decelerated from 10,5 percent in 2012 to 4,5 percent in 2013, due to adverse weather conditions, weak demand for key exports, and election-year uncertainty. GDP expanded by three percent in 2014. The external position has also been worsening, with low international reserves, a large current account deficit and growing external arrears. Fiscal pressures, which had been worsened unbudgeted-for elections in 2013, intensified in 2014 due to higher-than-budgeted wage increases. Last week, Chinamasa cut revenue estimates for 2015 from US$3,99 billion to US$3,6 billion. Total expenditures for the year was revised downwards from US$4,115 billion to US$4 billion, inclusive of unpaid expenditures of US$158,4 million for the year 2014, a situation that will result in a budget deficit of US$400 million, which Chinamasa said “would be funded mainly through a combination of domestic and external sources”. The 2015 national budget had initially been expected to mobilise from the domestic market to cover a US$125 million deficit, but Chinamasa said government was “mindful of the financial implications of the domestic debt in terms of timing and sustainability of the repayments and debt service obligations”. It was not clear which external sources government would resort to fund the US$400 million deficit. Zimbabwe is currently without balance of payment support from multilateral and bilateral financial institutions and donors due to huge debt arrears. The International Monetary Fund, to which the country remains unable to access resources due to arrears, had said that only a strong track record of maintaining macroeconomic stability and implementing reforms, together with a comprehensive arrears clearance strategy supported by development partners, would allow Zimbabwe to resolve its large debt overhang. Biti said fiscal pressure would this year be worse than projected by Chinamasa and warned that the current wave of job losses triggered by a Supreme Court judgement that reaffirmed employers’ rights to sack workers on notice, would diminish revenues. “I do not think they will even meet even US$3 billion (revenue figures) by the end of the year. This is because the goose that has now been laying the golden egg, namely PAYE (pay as you earn) has also been affected by the new wave of retrenchments,” said Biti. He said the job losses would also result in a decline in value added tax due to an erosion of disposable incomes. “What you are going to see now is a serious bind where revenue will have to be revised downwards (to) in my estimation, US$2,8 billion,” said Biti, who indicated that this would still need to support the same expenditure levels because it was unlikely Chinamasa would be able to reign-in expenditure. In his 2015 budget, Chinamasa said 4 610 companies had shut down last year and that hundreds of jobs had been lost. Biti said the situation had now been exacerbated by the Supreme Court judgment which has resulted in over 20000 workers losing their jobs within weeks across different sectors of the economy. “More than 800 companies have closed between January and July,” said Biti, who did not indicate the source of his statistics. But, clearly, the country’s economy is in as much distress as millions of its unemployed citizens. The Zimbabwe National Budget Coalition (ZNBC) said it was concerned by the projected slowdown in GDP growth but said the greatest casualties would be “70 percent of the population resident in rural areas”. “However, we raise concern that the blanket ban of second hand clothes will have an adverse impact on the poor and unemployed who can’t afford to purchase new clothes in the formal sector,” said ZNBC in a statement on the fiscal policy review. newsdesk@fingaz.co.zw